Fed QT Begins, OPEC+ Solidarity Frays, ISM PMI - What's Moving Markets

© Reuters

By Geoffrey Smith 

Investing.com -- The Fed's Quantitative Tightening begins. In Europe, manufacturing slows to its most sluggish in a year and a half as the Ukraine war grinds on. President Joe Biden is to send long-range artillery to Kyiv to help it staunch Russian advances in the east of the country. OPEC's solidarity with Russia is starting to fray, while stocks are set to drift ahead of the ISM manufacturing survey. Salesforce and HP keep the mood upbeat with their quarterly reports. Here's what you need to know in financial markets on Wednesday, 1st June

1. QT begins as Yellen admits misjudging inflation

The Federal Reserve’s balance sheet reduction policy comes into force today, although the effects are unlikely to be felt until June 15, when the first bonds held by the Fed will be allowed to mature.

That process will take up to $47.5 billion a month out of the financial system, doubling to $95 billion a month in September, further tightening financial conditions as official and market interest rates rise.

New York Fed President John Williams and St. Louis’ James Bullard are due to speak later, a day after President Joe Biden met with Chair Jerome Powell to let him know exactly who was to blame for the current situation. Treasury Secretary Janet Yellen was arguably more honest in acknowledging to CNN that she had underestimated the strength of the inflation dynamic created by pandemic stimulus programs.

Outside the U.S., the Bank of Canada is expected to raise its key rate by 50 basis points to 2%.

2. OPEC+ solidarity starts to fray 

The solidarity of the ‘OPEC+’ alliance is fraying in the wake of the European Union’s adoption of measures that will make it all but impossible for Russia to comply with the group’s production agreements.

The Wall Street Journal reported on Tuesday that some OPEC members are considering ‘exempting’ Russia from the deal, which would be a likely prelude to the rest of OPEC increasing output more. Long-term oil exporters such as Saudi Arabia and the UAE – both of which have spare capacity – are uncomfortable with a level of prices that will cause demand destruction and accelerate the shift away from oil.

The last few days have seen some high-profile diplomacy, with Russia’s foreign minister Sergey Lavrov visiting Saudi Arabia to lobby for continued solidarity. China’s Xi Jinping meanwhile held a call with his counterpart in the UAE, and France’s government talked to Iraq’s about the possibility of raising output.

The American Petroleum Institute’s data on U.S. stockpiles are due at 4:30 PM ET, a day later than usual due to the Memorial Day holiday.

U.S. crude futures fell as much as $5 a barrel before recovering nearly half their losses by 6:30 AM ET.

3. Stocks set to drift; Salesforce, HP upbeat; ISM eyed

U.S. stock markets are set to open higher but within their recent ranges later, as the ebbing of the first-quarter earnings season leaves the market more exposed to trading on economic data.

The Institute of Supply Management will provide the most important data point on Wednesday at 10 AM ET with its purchasing managers index, along with the Labor Department’s monthly Job Openings Survey.

Stocks likely to be in focus later include Salesforce (NYSE:CRM) and HP (NYSE:HPQ), both of which released upbeat earnings and guidance after the bell on Tuesday. Hewlett Packard Enterprise (NYSE:HPE) reports later.

4. European manufacturing hurt; ECB rate hike debate bubbles

European manufacturing expanded at its slowest rate in around a year and a half in May, hit by the familiar factors of surging energy prices, supply chain problems originating in China, and the blow to confidence from the war in Ukraine.

The Eurozone manufacturing PMI compiled by S&P Global fell to its lowest since December 2020, while the U.K. analog fell to its lowest since March 2021. The U.K.’s problems were compounded by Brexit difficulties: export orders fell for the eighth month in nine.

The data follow a big overshoot in May inflation for the Eurozone, which has prompted two European Central Bank officials to break with the guidance given by the ECB’s top management on how quickly to raise interest rates. Austria’s Robert Holzmann and Slovakia’s Peter Kazimir both signaled their openness to a half-point hike in the deposit rate as early as July.

5. Biden to send rocket artillery to Ukraine

U.S. President Joe Biden confirmed the U.S. will send rocket artillery to Ukraine, hoping to tilt the balance of the war back in Kyiv’s favor after Russian forces ground out steady battlefield gains in the Donbas region in recent days.

The U.S. will send its wheeled High Mobility Artillery Rocket System, or HIMARS, which has a range of 48 miles. However, it backed off sending longer-range systems due to fears that Ukraine would use them to strike targets in Russia. That’s something that the Kremlin has said it would see as a major escalation of the conflict it started in February.

In an interview with Newsmax aired on Monday, Ukraine’s President Volodymyr Zelensky rebuffed suggestions that the country should trade land for peace with Russia.